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James Hyerczyk
Natural Gas

As I sit in Fort Myers, Florida, paradise to those of us who live here all year, its 46 degrees Fahrenheit. That’s 13 degrees above freezing for those of you scoring at home. The Gulf of Mexico is cold, my swimming pool is uncomfortably cold and there are reports that iguanas are falling out of trees because of the extremely low temperatures.

But we knew it was coming so we prepared. That pretty much sums up the natural gas market last week. The professionals forecast the cold two weeks ago and they ran the market higher. Then the new forecasts came out for two weeks from now and they dropped prices sharply. That’s the way it works in the natural gas market unless you are bold enough to trade the spot or cash market, which tends to react to surprise weather developments.

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My cold temperatures aren’t going to last. In fact, we rarely have lingering cold and I’ve actually seen the temperature bounce on my outdoor thermometer from the low to the high of the day in just a matter of hours. This cold front is the same with high 70’s forecast later this week.

The point I am making here is that it is winter and it gets cold. I’m originally from Chicago so I know what real cold is. I even know what biting cold is since I’ve stood on the “El” platform at below zero and a 30 mph wind gust.

When there is a “lingering” cold system or a cold pressure dome present, essentially a cold spell that just won’t go away for some time, natural gas futures tend to rally for longer periods of time. Makes sense to me. But that’s something traders haven’t faced for years.

The weather pattern this winter appears to be the same one we’ve seen the last two winters. Namely, the cold temperatures have come and gone quickly and conditions have returned to normal in a reasonable amount of time. In other words, the cold hasn’t lasted long enough for a meaningful rally to gain traction.

Weather Still Driving the Price Action – Volatility Ahead

During the holiday shortened week, the futures market started out higher, then fell sharply across the board as “a milder turn in the most recent weather models and a disappointing storage report hammered price,” according to Natural Gas Intelligence (NGI).

Early in the week, the weather models pointed to chilly conditions at the end of the month that were seen spilling over into January. However, both the American and European models backed off the intensity of the cold in more recent runs, NGI said.

Weather is expected to remain in the driver’s seat when it comes to price action over the coming weeks. Bespoke Weather Services said it suspects there is more model volatility to come, and that the pattern will likely continue exhibiting some variability. However, the pattern cannot go “truly” cold with the Pacific setup in place.

“Still, we believe a variable pattern can be bullish with prices now as low as they are, but we stress caution and lower confidence given that we are heading into a long weekend with multiple days for weather models to change.”

For a look at all of today’s economic events, check out our economic calendar.
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